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Economics: Money & Financial institutions - Speech or Presentation Example

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M1 and M2 has been on the increase since 2007, there has been a gradual increase in M1 and M2 and the reason why this is the case is due to increased government spending aimed at helping the economy y to recover from the recession.
Value of share traded refers to the total…
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Economics: Money & Financial institutions
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Question A. money and its functions: Definition: Money can be defined as anything that is acceptable in the payment of products in an economy. Functions:
The four functions of money include:
Exchange medium: - money is used in the exchange of products in an economy
Accounting unit:-money is used as a unit of measure in book keeping
Deferred payment settlement: - money is used in the settlement of debts
Stores value: - money can be used to store value, example cash deposit in bank (Sherris (1996))
b. M1
Definition: M1 is derived from summing up the total currency, checks, demand deposits and other checkable deposits (OCD) the four week seasonally adjusted M1 average as at September is $1652.5 billion
M2:
Definition: M2 is derived by adding up savings, small deposits, retail funds and M1. The seasonally adjusted M2 four week average as at September is $8296.7 billion
Previous and current year M1 and M2:
M1 and M2 has been on the increase since 2007, there has been a gradual increase in M1 and M2 and the reason why this is the case is due to increased government spending aimed at helping the economy y to recover from the recession.
Question 2:
a. financial market:
Value of share traded refers to the total number outstanding shares multiplied by the share price, therefore given an example that $30 trillion shares were traded in the NYSE then this means that this is the price of shares multiplied by the total shares outstanding and therefore it is true to state that this means that the companies have borrowed $30 trillion shares from the public in shares given that outstanding shares are those shares that are held by the investors.
b.
The primary market is the financial market where new securities are traded. The secondary market is a financial market where previously issued securities are traded
(i) Sofia buys 200 shares in Disney Corporation: In this case if these are newly issues shares then this constitute the primary market but if the stocks were previously issued then this constitute the secondary market. The capital market is a security market for long term borrowing while the money market is a market for short term borrowing; in this case therefore the transaction is part of the money market. Finally the transaction constitutes equity given that the company raises capital through issuance of shares.
(ii) James takes a mortgage to buy a house: This transaction constitutes debt, this is due to the fact that James owns the mortgage company, the transaction is part of the capital market given that the repayment period exceeds one year.
(iii) Goldman Sachs buys $1m of commercial paper of IBM that is on the market.
This transaction constitutes debt and also part of the money market; this is because a commercial paper is a promissory note that matures in less than one year.
Question 3:
In 2004 the household outstanding market debt was $10552.4 billion and in 2007 the value was $13754.2 billion, therefore the additional debt was $3201.8 billion
i. Instrument that accounted for the majority of the change:
The instrument that accounted for the majority of the change was mortgages that increased by $3875.4 billion.
ii. Credit market borrowing in 2008
There was a slight increase in the second quarter compared to the first quarter of 2008, for the third and fourth quarter there was a relatively higher increase in credit market borrowing compared to the second quarter borrowing. Treasury securities were traded a lot more while agency and GSE backed securities were traded a lot less.
iii. Net worth: in 2008 household net worth declined compared to previous years, there was a continuous decline in the household net worth in the four quarters; the reason why there was a decline is due to the decline in disposable income.
Question 4:
a. present value of asset:
the present value of an asset is the value of an asset today taking into consideration future income that can be generated by the asset, it is an important value in that it helps in comparing debt instruments, it helps identify the most optimal choice and also in determination of investment risks involved.
b. yield to maturity:
i. $10,000 loan to be repaid in two years value $12,000
pv =v/ (1+i) t
v = 12,000
pv = 10,000
10,000 = 12,000/ (1 + i) 2
10,000(1 + i) 2 = 12,000
(1 + i) 2 = 12,000/10,000
1 + I =1.095445
i = 0.095445
The yield to maturity or the internal rate of return = 9.5445%
Formula to determine the yield to maturity is:
Yield to maturity = (V / PV) ½ - 1
Where V is the loan value and PV is the present value
ii. $400 face value bond, $100 coupon and maturity 3 years
Interest to be paid is $100 in three years
From the above
pv =v/ (1+i) t
In our case
pv = 400-100 = 300
v = 400
300 = 400/ (1 + i) 3
300 (1 + i) 3= 400
(1 + i) 3= 400/300
(1 + i) = (400/300) ⅓
(1 + i) = 1.100642
I = 0.100642or 10.0642%
Formula;
Yield to maturity = (V / V-coupon value) ⅓ - 1
Where V is the face value
References:
Federal Reserve (2009) flow of funds release 2009, retrieved on 28th September, from http://www.federalreserve.gov/releases/h6/Current/
Federal Reserve (2009) money supply, retrieved on 28th September, from http://www.federalreserve.gov/releases/z1/Current/z1.pdf
Michael Sherris (1996) Money and capital markets: pricing, yields and analysis. McGraw Hill press: New York Read More
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